Thursday, July 19, 2012

It was
American economist Richard Florida, who coined the term “creative class”. He
described the phenomenon in his “Rise of the Creative Class”. Strategy-2020 by
Vladimir Putin has introduced the term to Russian political science and
economics. According to authors, it is the creative class that bears the
innovative thinking and the entrepreneurship spirit. The hopes for the timely
modernization are still pinned to it — deprived of that, Russia is destined to
become yet another “third world” country.

However, in
the winter of 2011 the term “creative class” was used to dub the “angry mob” of
citizens, hundreds of thousands of whom have hit the Moscow streets, defying
the election results. The majority of them is bound to entrepreneurship in one
way or another. Alas, in order to survive they have to apply their creative
skills to accounting, rather than technological innovation. By the way, Russians
have heard of “creative accounting” long before they came to know about “creative
class”. Unfortunately, the phrase served as a popular euphemism for the “off-the-record
accounting”. The existing taxation system gently pushes the “creative class”
towards the “dark side”, while the methods of tax management deprive it of any
options.

Myriads of
three-line-long contracts that cover payments in cash, well-settled practice of
cashing the sham contracts out, mickey-mouse companies and other components of
the modern Russian business scene have turned the vital part of the economic
life into a nutrient environment for corruption and, perhaps, the most criminal
occupation of our time.

We may argue the hell out of what part of
economics is off-the-records exactly, but no one knows the precise percentage. Ministry
of finance has recognized the recent attempt to amend the Labor Code in order to
prohibit paying the wages in cash — allegedly to legalize the turnover — for
what it was, the banking lobby, which has very little to do with bringing the
economy out of shade.

Economic
behavior of the business entities is submitted to a natural law of minimizing
the losses and maximizing the profits and no punishment will ever change the
status quo. There is the only way out of that — to change the tax legislation,
describing each tax with precision and clarity that allow no misinterpretations
and make the misdeeds unprofitable. This change doesn’t mean lowering the taxes
— the goal is to change the business philosophy instead. The Tax code currently
in force and the infinity of bylaw acts that regulate its application leave a
huge space for its interpretation, giving birth to bureaucratic rule and
instigating business to proceed with the “creative accounting”. The conclusion
is simple: tax rules must be very specific, unequivocal and protected against sly
tax-evading combinations. So why don’t we take the path of changing the
existing situation with the profit tax for companies, following the example of
Europe?

According to
the tax legislation currently in force, “taxpayer reduces the earned revenues
for the amount of his expenditures”… Expenditures are the substantiated… losses
that the taxpayer incurred. Substantiated losses are defined as the money
equivalent of economically justified expenditures, estimated”(Art. 252 of the
Tax Code of the Russian Federation). If you ever tried to explain tax
authorities officer that these exact expenditures were “economically
substantiated”, you must have a pretty clear idea of what I am talking about. The
very definition of “economical grounds” is quite vague and leaves plenty of
space for the discretion of a bureaucrat, investigator and then a judge. Well,
each of them has his own idea of economic justification in this particular
business! Opinion of the entrepreneur is of no interest to them. So “pay the
cash down, sir, the hell you need your wealth for”.

There is but
one way out of this taxation dead-end: to allow companies list any expenditures as economically
grounded, i.e. acknowledge any expenditures but those, which the legislators
will deem necessary to unequivocally ban. At that, the restriction must be
crystal clear (for instance, prohibiting to list purchase of air transport as a
prime cost expenditure for the companies not engaged in air traffic). The rest must
be allowed.

Advantages of the transparent turnover

Imagine the
situation, when accompany owner will be able to build himself a house, listing
the construction costs as the prime expenditures, i.e. completely excluding
these expenditures from the taxable base. What will it lead to? The consequences
are many and varied. For instance, a house will be the property of the company
then, rather than its owner. Paying for the construction materials and for the labor
he would have to demand the sellers and the contractors to write the invoices
with actual figures (the greater they are — the more he will be able to save on
taxes). The latter ones, in return, would have to file honest reports to the
tax authorities, since making out the invoice means the need to record the
incomes as received. This may seriously confine the opportunities of using
underhand cash and will increase the taxable base for VAT, uniform social tax
and profit tax.

Each extra
economic entity, involved into the legal money turnover, will inevitably become
one more taxpayer. Making out invoices and recording incomes in their entirety
as received (otherwise, the very first inspection will expose this misdeed in
no time) will force the company to pay VAT from each legal bargain, and mind
that this tax has a doubled “weight factor” in the budget as opposed to the
profit tax. All the participants of legal deals will have to pay small, yet
fair tax to the budget.

This decision
has one more important feature. Imagine living in a house and driving a car
that belong to your company. Every single thing in the house is not yours
either. You will protect this company better than the apple of your eye. A
thought of causing troubles with tax inspection (setting it up, using the neo-Russian
term) or not fulfilling contract obligations will never occur to you. Life
without a roof over your head, a car and everything else makes a gloomy
prospect. In Europe businessmen ask for invoices, while fueling their cars up, purchasing
equipment and even office accessories. Their business card will surely contain
the taxpayer’s identification number and all the appropriate company details
for making out the invoice, which is why any tax check will easily find the off-hand
cash.

Without doubt, if we imagine just for a
second that these steps are taken, it would help to bring the major part of
Russian economics out of shadow and draw the era state governed by rule of law
closer. The permission to list all expenditures as prime cannot be applied to
all the sectors of economy though. Large businesses might do without it, since
it is the small and average businesses that have to hide their revenues. Yet
another important aspect of the proposed innovation is the reduction of the
amount of non-recorded cash, which indeed is the nutrient environment for
corruption.

Forestalling
the objections that it would decrease the profit tax, I would like to denote
that it is not a major budget-forming element at all. In 2010 the collected
profit tax for Russia in general made up merely 255 billion rubles or 3.07% of
all the gathered taxes. Given the effect of inevitable increase of legal
accounting, once the proposed model is adopted, these losses will be partially
compensated with VAT and other taxes, paid by companies involved into the legal
money turnover. As for the legalization of economic life and the decline of
corruption — well, those are utterly priceless.

And if we
add the released creative capacity of the creative class — which would be free
to upgrade the country, instead of dedicating its talents to “creative
accounting” — the entire thing is surely worth trying.